When executives become Malware

“I see this as the most damaging event for our brand in the company’s 140-year history…I don’t think these problems can be overcome overnight.”

The picture of Toshiba’s CEO making a ritual deep bow of contrition while cameras whirred and flashed has gone round the world. Hisao Tinaka resigned most publicly on Tuesday 21st July 2015 at a press conference.

He was referring to the accounting scandal at this global company which under his watch has inflated company profits by more than a million dollars over a seven year period.

Since the scandal surfaced in April, operating profits have tumbled by $44bn, and the share price by 26 per cent though it has since partly recovered.

Mal-Execs

The recent events at Toshiba are uncomfortably close to the sort of impact Malware makes on a computer.

When Malware invades a computer, things may rapidly go from bad to worse. One minute the machine works fine.

Next, unwelcome new programs are forcibly installed. Nasty pop ups won’t go away. Regularly used programs may be deactivated. And in the worst case, valuable information and privacy data are compromised.

In short, Malware triggers a computing environment that becomes ever more unmanageable.

Toshiba, a global company, has been infected with what we might reasonably call “Mal- execs”.

Now, not only has the CEO gone, so have half a dozen other managers, along with the vice-chairman.

These infiltrated the enterprise over many years. By the time they were ejected by the body corporate much costly destruction had been wreaked on the company.

This particular strain of “Mal-execs” has led to the entire Toshiba company to being unable to know its true financial position at the end of its normal financial year this March.

In fact, the saga is turning into something of a classic integrity case study. The particular strain of “Mal-execs” that has brought Toshiba low, is best known as “obsession with short-termism.”

Tips Ignored

An independent panel of external lawyers discovered “institutional accounting malpractices.” This is a polite way of saying the entire company is riddled with “Mal-execs”.

Yet these could never have survived an open culture, where any employee might feel compelled to draw attention to the dangers from such behaviour.

For while anonymous tips about Toshiba’s accounting to Japanese securities watchdogs did occur, almost nobody within the company felt able to put their heads over the parapet. The notable exception was an internal auditor who saw the bad signs, but was repeatedly ignored when he raised the issue. This reflected a corporate culture where, according to the external report:

“It was impossible to go against the boss’s will…there was systematic involvement including top management.”

As with computer Malware, it was not be obvious what was happening, until something surfaced that could not be ignored, making it apparent there were major problems within the entire system.

Hisao Tanaka, Toshiba’s now ex CEO, and his predecessor who was vice-chairman were both said to be fully aware profits were being inflated. Yet both failed to take action to end the improper accounting.

According to local media, the panel reportedly found emails showing Mr Tanaka and another senior figure instructing employees to delay the booking of costs to make the financial figures look better.

This is the sort of thing “Mal-exces” do, and why it’s so tricky disinfecting a company from their grip.

Meanwhile, Standard & Poor’s, the rating agency, has said the required restatement of Toshiba’s profit could lead to its credit rating being downgraded.

Toshiba is not alone

Nor is Toshiba a sole victim of such practices. Tesco, the UK largest supermarket by sales has been tainted with a similar dose of “Mal-execs.”

Profits were inflated by £250million and there is now a criminal investigation under way.

Another “cost” is being paid by employees, The company intends to slash 10,000 jobs as it tries to recover from its scandal. A further price has been the closure of some regional offices

The retailer, which banked £1.6bn profit in the first six months of 2013, is now expected to make half that this year. The seriousness of the situation means the figure could fall further still.

One of the worse cases of “Mal-execs” also occurred in Japan, with the notorious accounting scandal at Olympus. In April last year, the company was sued by six banks for a total of 27.9 billion yen ($273 million) in damages.

Incidentally this the largest amount among civil lawsuits filed against the Japanese camera and endoscope maker over a 13-year accounting fraud.

The banks are demanding compensation for damages resulting from false financial statements filed by Olympus between fiscal 2000 and 2011.

The company’s English ex CEO who blue the whistle on the bad practices at Olympus, now makes a healthy living touring around the world telling the story of his actions which also led to his dismissal.

As the Toshiba, Tesco and Olympus stories show, the penalty for allowing a “Mal-execs” infection to take hold can be expensive and prolonged.

The price paid includes, large profit reductions, damaging loss of employment, precipitous falls in share price, loss of employee morale and stakeholder trust. Other costs include an increased price of raising capital.

After the fall

Once a computer has been infected by Malware, older forms of protection can no longer be trusted. New ways of guarding against damaging incursions must be found and installed.

Similarly, the value destruction imposed by “Mal-execs” in Toshiba, Tesco and Olympus meant previous assurances about the companies’ cultures could no longer be taken for granted.

Inevitably, there must first be deep heart-searching to discover what will protect the company in the future from ethically challenged executives. Toshiba in its latest statements promised:

“We will carefully analyse and examine the results and recommendations made by the third-part panel…and consider preventative measures”

According to the accountancy body CIMA in its 2008 review of company fraud, the reaction to the tales of “Mal-execs” bent on fraud is likely to be

“Organisations sit back and watch, telling themselves that ‘it couldn’t happen here.’ But the reality is that fraud can happen anywhere.”

In fact, as CIMA pointed out, any company can suffer the equivalent of Malware amongst its leaders and managers. For example, various surveys in recent years, show a high percentage of frauds committed by senior management and executive obsessed with profits and driven by greed.

Some of the elements that go towards deterring executives from behaviour that will damage a company include those shown in the table.

While these and other aspects of an open culture may help keep Mal-execs” at bay, the task is made harder when, as in Toshiba and Olympus, the perpetrators are right at the top of the organisation.

Managing Integrity

In 2014, one in three computers around the world were said to be infected with Malware and some 27 million forms of malware were created each year.

By comparison, “Mal-execs” as a phenonmenon is perhaps rather less prevalent in companies. The environment in which they work though seldom provides much of a deterrent—see panel.

Nor is hiring only employees with apparent high levels of morals and ethics a sure-fire method for preventing a major scandal, as the Roman Catholic Church has painfully realised.

Ultimately it’s the culture of the company that provides any assurance that “Mal-excs” won’t flourish. Yet even this is no firewall.

What matters most is the extent to which the company as a whole cherishes its integrity, guarding it jealously.

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